How Patent Reform is Lethal

The Patent Act of 1790 granted patents to “he, she, or they”[i] at a cost that even a pauper could afford.[ii]  At a time when women and blacks could not own property, both could own patents… and both did.  In 1809, Mary Kies became the first woman patentee for her invention related to weaving straw hats.  In 1821, Thomas L. Jennings became the first black patentee by inventing a method of dry scouring clothes.  During the 1800’s, some 3,300 women invented and patented 4,196 inventions.[iii]   The U.S. patent system leveled the field for all regardless of race, gender or economic status. 

Largely because of broad-based participation and strong patent rights,[iv] the U.S. patent system has fueled the greatest economic expansion in the history of man, propelling America to lead the world in virtually every technology revolution, including the one we are in right now.  Great inventors like Eli Whitney, Thomas Edison, Alexander Graham Bell, along with many others like Mary Kies and Thomas L. Jennings, inspired generations of inventors.  The rich history of the U.S. patent system, the value to our economy, [1] and its promise to each of us is the heart and soul of America.

Today, the U.S. patent system is under a lethal legislative attack[v] encouraged by the lobbying and public relations efforts of large corporations.[vi] [vii] [viii]  This attack is ostensibly directed at the problem of so-called “patent trolls” for the benefit of small businesses.[ix] [x]  Incredibly, data supporting this legislation is fabricated and then repeated so often that it appears true.  It is, however, not true. 

Nonetheless, the anti-troll legislation currently rocketing through Congress will levy its damage on the patent system in general – disabling it for individual inventors and small businesses for the benefit of large corporations.   The legislation will damage the investment qualities of patents, which will make it impossible for individual inventors and small businesses to recover any value of a patent.

To understand how this round of anti-troll legislation will cause such widespread damage, it is necessary to understand the economy of the U.S. patent system. 

This paper is directed toward that understanding, along with understanding the so-called “patent troll” situation, and proposing legislation to fix the root of the problem.

What is a productive patent system?

A productive patent system has two parts.  First, it encourages an inventor to publicly disclose an invention so others can build upon it.  Second, it promotes adoption of the invention so that society can benefit. 

To satisfy the first part, disclosure, the inventor’s contribution to society is returned with an Exclusive Right to the invention, which is the right to exclude others from making, using, importing or selling the inventions for a short period of time. 

The second part, adoption, is made possible by the Exclusive Right to an invention as applied to our free-market economy.  The Exclusive Right enables the inventor to secure a return on the investment and hard work expended on an invention that is proportional to its market value.  By keeping competitors at bay, the inventor is able to secure a toehold in the market.  While some argue that this is monopolistic and anti-free market, the invention did not publicly exist at the time the inventor disclosed it.  The inventor took nothing from society in trade for the Exclusive Right, and had the inventor not disclosed it, society would recognize no loss.  Because the inventor did disclosed it, society recognizes a gain; society can access an invention, and build upon it, thus expanding innovation and the economy.  A second gain is recognized when the Exclusive Right expires, and society owns the invention. 

If an invention is going to be built and brought to market, millions of dollars may be needed.  As discussed previously, one positive result of the U.S. patent system is broad-based participation that encourages everyday people to disclose inventions.  However, most people do not have a lot of money.  So to build a company, most inventors need to attract capital investment.    

Investors manage their risk so that they get a return on their investment, hopefully at a profit.  To determine the probability of that return, a company’s financials are analyzed.  Investors also examine company assets.  Assets often serve as a floor for losses as assets can be sold in the event the company fails.  An inventor, who is starting a company based on an invention, probably does not have any revenue or profit.  What they have is a patent.  For an economic system to work, the patent must be capable of attracting capital investment; it must be an investment grade asset

While the U.S. Constitution wisely secures the Exclusive Right of an invention for the inventor, that alone is not enough to make it an investment grade asset.  A patent is an intangible asset.  It is an idea that has been reduced to practice and publicly disclosed.  In other words, the invention disclosed in a patent can be built just by reading and understanding the patent.  Unsurprisingly, a patented invention can be easily copied and brought to market by someone other than the inventor.  This, of course, would be illegal due to U.S. Constitution, but Congress writes the laws and the courts enforce the laws as written by Congress.  For a patent to have any value, the law must give it a strong Presumption of Validity, so that everyone knows a patent is valid on its face and its Exclusive Right will be upheld by the courts.[2]

Any asset put up as security against a loan must be capable of transferring ownership in the event a loan against it is not repaid.  For example, no bank will loan money against your house if they cannot take possession of it if you do not pay them.  It’s the same for patents, so ownership of a patent must be able to transfer to a different owner.

Just the capability of transferring ownership is not enough for a patent to be an investment grade asset.  Any transfer of ownership must also transfer all of the patent’s capabilities (Presumption of Validity and Exclusive Right).  Imagine if you sell your house to someone and that person cannot use the kitchen, it would obviously not be worth as much to the new owner as it was to you.  If that were the case and the bank repossessed your house, the bank would not be able recover the same amount of money that they loaned to you because the next buyer would not pay as much as you did if they can’t use the kitchen.  Banks would value the house on the value remaining to someone else after you – not the value that existed when you owned it.  Patents work the same way and must transfer all capabilities to any subsequent owner.  The inventor may practice the invention, but if an investor ends up owning a patent, the investor is not likely to practice the invention.[3]  After all, investors do what they do best, they invest money – they do not run product companies.  That means that for a patent to be able to attract capital investment, all capabilities must transfer with ownership regardless of whether or not the invention is practiced. 

To encourage investment, the Founders viewed patent rights like they did property rights[xi]  and enshrined the Exclusive Right to a patent in Article 1, Section 8 of the Constitution.  Congress followed up by providing strong legal protection for both the Exclusive Right and the Presumption of Validity in the Patent Act of 1790 and all subsequent laws (until the America Invents Act (AIA) in 2011)[4].  The courts then upheld these laws,[xii] which created a patent with a defined and durable value that others, such as investors, would desire.  It created an investment grade asset.

This is the genius of the U.S. patent system.  A U.S. patent, standing on its own, is an investment grade asset, [xiii] which can be bought and sold like any other asset.   An economy emerged around patents, which enabled inventors to attract capital so they can build businesses and protect their inventions.  The adoption of the patented invention into a free-market economy thereby fueled the overall economy, creating jobs and dynamically expanding innovation.[xiv]  This economy of the U.S. patent system is based on both inventors and capital with a patent acting as an investment grade asset pulling the two together.   

Weakening patent rights weakens the patent economy and thus the overall economy.  If weakened enough, it will collapse the patent system.  Where patent rights are uncertain, expensive, driven by class hierarchy, or otherwise weak, which were the hallmarks of patent systems prior to the U.S. patent system,[xv] a patent is often too expensive to obtain and too risky enforce.  Thus, it is incapable of attracting capital investment.  If a patent cannot attract capital, it cannot be practiced or protected and cannot return value to the inventor.  Few inventors will expend the exceptional levels of time and money required to get a patent if there is no reasonable chance of return on that investment.[5]

This all boils down to one thing: weak patent rights create a perverse incentive to secret inventions or ignore them altogether, which hobbles innovation, slows job growth, and harms the economy.  In contrast, strong patent rights foster more and newer inventions and fuel economic growth. [6]

What’s wrong with the “patent troll” argument and the data supporting it?

Some characterize “patent trolls” as rich investors who hijack[xvi] patents from inventors.  Then, while providing no societal value, these “patent trolls” are viewed as extorting billions of dollars from small businesses and threatening R&D-related value creation based on the patent.[xvii] [xviii]  Others describe “patent trolls” as lying in wait for the market to develop on an invention, and then sneaking up and attacking unsuspecting infringers.[xix]  Confusingly, some even allege that “patent trolls” actually invent new technologies themselves and then they patent it.[xx] 

Incredibly, the figures supporting this characterization are false and unprovable.  The underlying data, and the conclusions based on that data, come from biased sources with vested interests in a weak patent system.[xxi] [7]  Worse, the underlying data is secreted making it impossible for others to verify the findings.[xxii]  For example, one widely publicized report attacking the quality of patents owned by “patent trolls” states that ~90% of cases brought by so-called “patent trolls” lose when brought to court.[xxiii]  This report is highly disputed with contrary evidence showing virtually no difference between “patent troll” owned patents and all others.[xxiv]  Another report attacking the societal cost of “patent trolls” states that the “direct accrued costs” of “patent trolls” was $29B in 2011 and that this is somehow a bad thing.[xxv]  This report is frequently cited despite that the “direct accrued cost” actually represents perfectly legitimate and often voluntary licenses paid to patent holders for the use of their patented technologies.[xxvi]  In another widely used and misleading report, the number of lawsuits filed by so-called “patent trolls” has tripled from 29% to 62% since 2011.[xxvii]  The actual increase is near zero; the cited numerical increase is a direct result of rule changes in the America Invents Act (AIA) that forced suits against multiple infringers to be filed separately.[xxviii]  In other words, the AIA forced the most compelling statistic supporting the anti-troll legislation – case count – to move significantly up, thereby creating a false basis supporting the new round of anti-troll legislation.

Notably, all reports where the underlying data is made publicly available contradict the reports where data is secreted.  The truth is, even if there is a real problem with a few people abusing the system, the economic impact is far lower than claimed and is no different than has been the case for over 200 years.[xxix]  The risk associated with such misconceptions is that the proposed cure may be worse than the disease or may even kill the patient.[8]

In an echo chamber that silences criticism,[9] lobbyists, the media, and politicians repeat these fabricated numbers as if they are true.  The danger is that a falsehood repeated enough times, will become a credible perception of truth, as has become the case.

It is ironic that the definitions used to describe “patent trolls” actually describe individual inventors, universities, small patent-based businesses, practicing companies and other legitimate patent holders who legally and rightfully enforce their hard-earned patent rights.[xxx] [xxxi] [xxxii] [xxxiii] [xxxiv] [xxxv] [xxxvi]

As will become apparent in this document, the anti-troll legislation, while targeted at perceived bad actors, will damage the U.S. patent system in general and fully disable it for individual inventors and small businesses – the very people this legislation and US patent system purports to help.  Curiously, large corporations will still be able to enforce their patents against smaller competitors.  Some have observed that perhaps the unintended consequences are intended.  

What’s wrong with the current U.S. patent system?

Over the last decade, our government has damaged patents in several critical ways. 

• The Exclusive Right was eliminated by the Supreme Court in eBay v. MercExchange.  The result is that a patent holder cannot exclude others from the invention because injunctive relief is now highly restricted.  Injunctive relief is a primary reason that potential infringers would license a patent before they build products on it.  Why invest potentially millions of dollars if you can lose the whole thing later?  Without the Exclusive Right, better positioned companies build products with no concern for patent rights and then saturate the market with infringing products.  Once the market is saturated, a patent that is incapable of injunctive relief is also incapable of attracting investment to practice the invention.  If they steal it, they keep it.  Why invest in a start-up company with no patent protection to compete in a saturated market?

Without an Exclusive Right, an infringer finds it economically advantageous to steal the invention and then litigate the inventor into oblivion or into capitulation with an arbitrary settlement. [xxxvii]

Also, without an Exclusive Right, arbitrary forced licenses become the primary remedy.  Thus a patent becomes an asset of arbitrary value, which reduces its ability to attract investment.

• The Supreme Court weakened the Presumption of Validity in both KSR v. Teleflex and Bilski v Kappos.  Both of these decisions increase the risk that a patent can be invalidated.  Then, the America Invents Act (AIA) added new Post-Issuance Procedures (PIP).  Prior to the AIA the only path to invalidate a patent was through the courts by showing clear and convincing evidence of a failure to meet statutory requirements of patentability, with the burden of proof placed on the party seeking to invalidate the patent.  Even though a patent is presumed valid in black letter law and this Presumption of Validity is key to its value, a PIP presumes invalidity.  This is because a PIP uses the administrative branch of government to validate (as opposed to invalidate) the patent with the burden of proof placed on the inventor who must again prove the patent valid.  The lowest level of evidence – more likely than not – is all that is required to initiate a PIP.

PIP’s turn the Presumption of Validity on its head by using dissimilar standards of evidence, conflicting methods of review, opposite burdens of proof and different branches of government.  PIP’s presume invalidity, which severely devalues a patent because infringers are incented to litigate until the patent is proven valid.[xxxviii]

• The AIA forced patent suits against similarly situated infringers to be filed separately.  Independent of that, courts sometimes reassign patent cases to jurisdictions closest to the infringer.  When taken together, each of those separately filed cases can be reassigned to different geographically dispersed courts.  This radically increases risk for the inventor because it opens the very real possibility of managing dozens of suits in multiple jurisdictions each requiring local counsel and each with potential to produce conflicting decisions on the validity of the patent.   

This increase in risk severely damages the investment qualities of a patent.[10]

• A patent can take ten or more years of examination at the United States Patent and Trademark Office (USPTO) before it is allowed, and present patent terms begin on the filing date, lasting 20 years.[11]  In one recent case, a patent application has been in examination for almost forty years.[xxxix]  This extraordinarily long delay creates incentive for potential infringers to strip inventions right from the USPTO website, incorporate the inventions into the company’s current product offerings and saturate the market long before an inventor has an enforceable asset.  Careers are made in less time.  Companies are started up and go public in less time.  Once the market is saturated, it is often impossible to leverage the patent to retake the market. 

When you add all this up, potential infringers have strong incentives to steal patented inventions, massively commercialize them, and then, if they are caught, litigate the inventor into oblivion or capitulation.[xl]  Most corporations are well capitalized and set up for litigation.  Inventors are neither.  The deck is severely stacked against the inventor and these risks act together to inhibit investment in patented technologies at any stage.  Without investors, inventors cannot recover. 

Why do so-called “patent trolls” even exist?

Today, patent rights are the weakest they have ever been in the 224 years of our patent system.  Because of the loss of the Exclusive Right, the new presumption of invalidity and the extremely high cost of litigating a patent law suit, patents are often sold to wealthy investors who specialize in converting patents into cash – the so called “patent trolls”.[12]  

As previously discussed, the claim is that “patent trolls” are a problem and they need to be addressed.  However, a recent GAO report required by the AIA[xli] [xlii] shows there is no “patent troll” problem in the first place.  It is fiction [xliii] created by large corporations who suffer the consequences of infringement and wish to steal inventions without such consequences.[xliv]

One repeated argument supporting the existence of a problem with “patent trolls” is that they attack defenseless small businesses.  The allegation is that a “patent troll” somehow believes the patent is probably not valid, but a small business cannot afford to fight and will settle anyway, so they send demand letters threaten litigation to extract easy money from defenseless targets.  On the surface, it sounds plausible, but the truth is far different.

While there may be some bad actors, there are few known nefarious cases.  The larger truth is that when a small business is sent a demand letter, the patent holder believes that business is infringing on a valid patent.   Demand letters provide a means to settle infringement disputes without litigation thereby lowering cost and speeding the process for everyone.  They do so with inherent risk for the patent holder.  Any recipient of a demand letter can file for a declaratory judgment of non-infringement and invalidity in their local federal court if they believe that they have been unjustly accused.  This is a major drawback for the patent holder because they risk having many actual court cases in multiple courts and if they lose on validity on any one of those cases, they lose the patent altogether.

To understand the current situation, it is necessary to understand how patent holders react in an extreme high-risk environment.  As previously discussed, the courts and the AIA have seriously weakened both the Exclusive Right and the Presumption of Validity.  There are multiple ways to invalidate a patent that lead to unending litigation.  A loss at any point, in any of the multiple ways, could kill the patent altogether and with it goes all of the investment and hard work that went into it.  It is high risk of total loss.

Naturally, patent holders are risk adverse.  However, risk is not shared.  Large corporations do not risk the loss of the business made possible by the invention and because the Presumption of Validity has been degraded, they often risk only the cost of litigation. 

Large corporations are well aware of this situation and are advised to litigate until the patent holder settles for the nuisance value of the suit – a far lower number than the invention’s market value. [xlv]  As a result, large corporations often all but dare patent holders to sue them.  Inventors often approach infringing companies in an attempt to sell or license their patents.  One of the authors has made contact via phone, email, third parties, certified mail, in person and through attorneys.  Most do not respond and none will talk unless sued.  Largely, infringers have no interest in purchasing or voluntarily licensing patents.  None at all.  There is economic incentive to do nothing.

For a patent holder, what remains is litigation with all of the associated risk.   Determining the best patent litigation strategy centers on minimizing risk in a very high-risk environment.  If you sue a large corporation, you will likely enter perpetual litigation with a high risk of invalidation.  If you sue multiple midsized companies, you risk multiple suits in multiple jurisdictions hiring local counsel in each jurisdiction at very high cost, extreme complications, and significant risk of multiple conflicting decisions from different courts.  However, if you sue smaller companies that risk drops and it may be the only remaining option.  It is the extreme high-risk environment of weakened patent rights created over the last decade that is driving this situation.   

Weak patent rights are the root cause of the so-called “patent troll” situation.  Further weakening patent rights will make the situation worse as more and more inventors are forced to sell to patent licensing companies, who may also be forced to pursue small businesses to manage an even higher risk environment.

What’s wrong with the current proposed legislation?

Suspiciously, no provisions in any of the current legislation (HR 3309 and the Senate bills) are directed to even attempt to fix the fabricated problem of “patent trolls”.  Instead, the considerable damage is curiously levied on the patent system in general and individual inventors and small businesses specifically.

• Patent Term Adjustment.   HR 3309 and other bills would eliminate any patent term adjustment for a delay created by the USPTO (a request for continued examination (RCE) or an appeal).  This provision would unfairly reduce the patent term (currently 17 years from issue) of a large number of issued and pending patents – some by a decade or more, and a few would be eliminated altogether.
• Shrinking Post Grant Review (PGR) Estoppel.  (A PGR is one of the PIPs created in the AIA)  The purported purpose of a PGR is to decrease the cost of litigation and to speed the process for both parties.   Under the current law, a PGR prohibits the petitioner from later arguing “any ground that the petitioner raised or reasonably could have raised during that post-grant review.”  HR 3309 and other bills would strike “or reasonably could have raised.”  This will allow a petitioner to argue any ground that could have been raised, but was not, in other post issuance proceedings and/or in court, thereby allowing daisy-chained defenses adding massive unnecessary cost and further perpetuating litigation.[13]
• Loser-Pay.  Patent litigation is already very expensive, highly risky and skewed unfairly in the favor of the infringer.  Loser-pay will eliminate patent protection for smaller inventions.  This is because smaller inventions cannot generate enough revenue to balance the increased risk of potentially millions in additional legal costs if the patent holder loses.  Smaller inventions make up the majority of inventions by individual inventors and small businesses.  Because of the substantial risk of losing a patent lawsuit already (and if this legislation is passed, even higher risk), few will file infringement suits and those that do could risk their patents and their company, and as you will see in the next bullet, their personal assets as well.  The risk of loser-pay to a large corporation is equivalent to a rounding error in the greater scheme of their financials. 
• Collecting fees from non-plaintiffs.  HR 3309 and other bills have a provision adding to Loser-Pay that allows prevailing accused infringers to collect legal fees from non-plaintiffs who have an interest in the case (for example, investors).  Few investors are willing to accept the risk of losing their personal assets in the event that the business fails, whether that business is patent related or otherwise.  Not surprisingly, this provision is lethal to the investment value of patents.

As previously discussed, it takes both investors and inventors for the patent system to work.  If it is lethal to investors, it is lethal to the inventor and the patent system overall will fail.

• Enhanced Pleadings and Limited Discovery.  HR 3309 and other bills have a provision that dictates enhanced pleadings requiring that the plaintiff produce substantially more information, and a provision limiting discovery prior to claim construction.  Patent suits are among the most complicated and detailed with a plethora of variables.  The trial judge is the closest to the case and legislating how that judge manages the case will damage the trial judge’s ability to bring a fair solution to both parties.  What’s more, both of these changes affect the inventor negatively and the infringer positively, thus stacking the deck even further against the inventor.

In addition to litigating court procedure, enhanced pleadings will “result in delays in filing suit and additional costs, and initial disputes in litigation about the adequacy of the complaints would increase the costs of litigation.”  And, limited discovery will “delay resolution” to “disadvantage of patent owner” even with “meritorious claims” thus the “alleged infringer is incentivized to draw out” the claim construction ruling. [xlvi]

How do we fix the real problem?

To address the real problem, we must strengthen the investment value of patents – not weaken it as the proposed legislation intends to do.  This will enable inventors to get the capital they need to practice and protect their inventions.  It will return value to inventors for sharing their inventions so others can build upon it, thus driving innovation.  It will dramatically cut litigation costs and time for all parties so that we can all get back to work and put our efforts into innovation just like we used to do.  It will create much needed jobs and improve our economic competitiveness at home and abroad.

Four things must be done to fix the real problem in the U.S. Patent System:

• We must reinstate the Exclusive Right guaranteed in the Constitution, black letter law and 224 years of precedent, which was judicially eliminated in eBay v. MercExchange. 
• We must eliminate all Post-Issuance Procedures to reinstate the presumption that a patent is valid.
• We must allow patent lawsuits to be filed against multiple similarly situated infringers in one court and ensure that same court keeps the suits.
• We must fully fund the PTO with all of the fees it earns so that it can do its job increasing patent quality and reducing pendency.
• Although not discussed previously in this document, we must eliminate the judicially created “abstract idea” category of subject matter eligibility and instead invalidate junk patents on the other statutory conditions of patentability like obviousness and anticipation.[14]

It is appalling that the U.S. patent system has become as weak as it has become.[xlvii] [15]  The U.S. patent system is a major part of the American story and American identity.  It has enabled common people to compete on par with large corporations for the market created by an invention.  It has propelled women and minorities to the highest social and economic levels in our society.  It has driven the greatest economic engine ever devised by man. 

The U.S. patent system is the very heart and soul of America and must be protected.

If Congress makes even small changes damaging the value of patents any further while patents are as weak as they are now, there will be no patent system except that which remains for large corporations to attack smaller companies and end users.

It is time we stand up to the moneyed multinationals and rebuild our national treasure.

Paul Morinville

Individual Inventor and Entrepreneur

[email protected]

Randy Landreneau

Individual Inventor and former President of the Tamp Bay Inventors Counsel

[email protected]